File- In this March 15, 2011 file photo, California State Controller John Chiang, looks over some papers during a meeting in Sacramento, Calif. The California controller will audit the city of Montebello a struggling city for financial irregularities amid suspicions that it submitted false, incomplete or incorrect reports. Chiang announced the upcoming audit Thursday in a letter to officials in the eastern Los Angeles suburb of 65,000, which also has been the target of federal and local investigations. ( AP Photo, File)

California will run out of cash by early March if the Legislature does not take immediate action, Controller John Chiang told budget leaders at the Capitol in a letter Tuesday.

The controller recommends borrowing and delaying some payments in order to deal with the shortfall, which he projects will last seven weeks. Absent that kind of action, the state could face sending IOUs and delaying tax returns.

"Although this cash management plan relies on still more borrowing, payment delays and deferrals, we believe this is the most prudent and responsible course of action considering we have about four weeks before the advent of a cash shortfall," Chiang wrote in a letter to the chairman of the Assembly and Senate budget committees.

The controller said the overarching problem is that, as of the end of the year, the state was spending $2.6 billion more than was included in the budget while tax revenues coming into state coffers were $2.6 billion below projections. He said that leaders need to find $3.3 billion to bridge the seven-week period.

However, further overspending and reduced tax income would make the problem worse. Part of the problem has been court decisions blocking budget actions, he noted. On Monday, a federal judge in Los Angeles issued a preliminary order blocking rate cuts 10 percent to providers of Medi-Cal, the state's health program for the poor.